Although June is shaping up to be the fastest month to sell a house from listing to closing – and we have even written tips on how to buy a house quickly and make the most of it – there’s one section of our industry that is not taking part of that race and is rather slowing down: Luxury Real Estate.
This slowing down has nothing to do with lack of affordability. In fact, there have never been more American millionaires . Currently, our country has 12.6 million luxury homes at the top 10% level of wealth, that is, above $1.2 million in total assets, according to the Federal Reserve Board’s Survey of Consumer Finance. Still, there’s no demand. The asking prices of luxury homes rose just 5.1% ever since 2016 in comparison to the 6.9% hike of traditional houses.
Truth is Luxury Real Estate usually does its own thing in its own time. It is natural being that way, right? Luxury Real Estate is an animal of its own kind. It has a particular clientele, a very exclusive financial ballpark and timing.
But we believe it could be something else. Actually, more than one thing. It never is just one thing; it’s a context, really.
First, let’s talk about Agequake and how the population pyramid affects the real estate market. The so-called “Baby Boomer” generation accounts for the majority of the millionaires inside that luxury homes clientele, and they are living longer than before due to science development. Baby Boomers were raised in a positive post-world war environment filled with governmental subsidies for growth and a true sense of “the world will be a better place”. Because of that, they were not a risk-averse generation. On the contrary, there were no limits to their investments, which in many ways contributed to the Great Recession. But, now, after that and after realizing they will be living more, they have become more risk-averse, and, when it comes to luxury homes, this slows down even more their appetite because they have the money to sit on it and only make a move if they are sure it’s a good one. Before, they would just buy a house (or sell a house) and let their offspring deal with it in case it turned out to be a bad investment. Now, with 15+ more years to live, they have to take more time to consider selling a house; what if the price is not the right one and it hurts their finances? Most of them are no longer working, so they need to be responsible with their asset management, and that means they cannot just go around buying houses without thinking of an exit plan to that investment.
On the other end of the population pyramid, the Millennials - that Baby Boomers love to diss - are a generation that was born in a pessimistic time. The slice of the employment pie available for them was reduced. And demanded highly specialized individuals. All of that made it almost mandatory for a Millennial to go to college in order to excel within this environment, creating even more obstacles to their financial independence. Mind you: that is a problem that goes beyond a luxury real estate forecast. It’s a general residential paradigm: Millennials prefer the rent route and to spend their money on traveling and other things that are more meaningful to them. Generally, to them, housing is just a matter of a bed under a roof, because they spend most of their day outside. So they settle for alternative housing like living in a mobile home or a houseboat. That’s why you see nowadays so many “tiny homes” across the USA.
But the problem with luxury properties regarding Millennials is that their definition of a Luxury Home is different from the one Baby Boomers have. To them, it’s not about square footage. It’s all about the smart home gadgets and possible amenities. It’s about green technology and “off the grid homes”. This is what makes modern luxury homes; its functionality more than its appeal. Marble might not mean a thing to a Millennial. Whereas nearby Starbucks, Whole Foods and other love brands might.
Aside from the generational aspect, there’s also a circumstantial aspect: because of the huge change in tax policy late last year, mortgage deductions and local real-estate tax write-offs added another barrier for the wealthy from all generation excerpts. It’s expected for the tax changes to force a 10% drop in housing prices across the board. So, luxury homes that could go for $900,000, now would face a $90,000 decline in their price. $810,000 dollars is still a lot of money, but a home seller might be tempted to cover his loss and hike the price even higher, making the whole “wheel of risk for Millennials and Baby Boomers” turn and turn.
Our Luxury Real Estate Forecast predicts things will slow down considerably. However, this is not meant to discourage anyone. Real Estate Agents shouldn’t just disconsider this niche; a low 5 digit commission is still worth waiting a little longer in a market of high supply and weak demand. And luxury home sellers shouldn’t get depressed. It’s just a downtime. We tend to overreact and look at economic hardship times as moments where everything is completely stagnant and nothing happens; people just suffer until the tides change. That’s far from true. Even in the Great Depression people still did business. It’s not like there was the complete absence of money; it just wasn’t as abundant as before. People were more cautious about it; deals involved less money than what it used to be perceived as ideal to that situation. And that’s what we predict for the luxury properties segment. A moment where the people involved with it – namely real estate agents and home sellers - will suffer because of their preconceived expectations.
Yes, it’s not the most inviting niche for new real estate agents. Real Estate Agents specialized in homes for the disabled, in cryptocurrency transactions or vacation homes do seem to be in a better spot than the ones with luxury properties as target. But we're not saying the luxury properties segment should be exclusively pursued by established real estate agents. It’s all a matter of either adjusting expectations or specializing more and think outside the box to add value to your luxury home listing. After all, value is perception. A dollar bill and a blank rectangular piece of paper are essentially the same thing, but are perceived differently, right? If you learn How to Host an Open House for Luxury Real Estate and present yourself flawlessly and work hard; who knows? Maybe you’ll cast a spell on your home buyers and make them, despite all hostile environment, spend the amount you wish and, from there on, fly high above until the luxury real estate forecast predicts nicer weather. When this happens – and eventually it’s bound to happen – you’ll be at an even premier position to benefit from it.
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